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THE AUDITOR’S RESPONSES TO ASSESSED RISKS

The Auditor’s Responses

to Assessed Risks

Hong Kong Standard on Auditing 330

HKSA 330 Issued June 2009; revised July 2010, December 2012

Effective for audits of financial statements for periods beginning on or after 15 December 2009


© Copyright 2 HKSA 330

COPYRIGHT

© Copyright 2009 Hong Kong Institute of Certified Public Accountants

The Hong Kong Standards on Auditing are based on the International Standards on Auditing of the

International Auditing and Assurance Standards Board, published by the International Federation of

Accountants (IFAC) in April 2009 and are used with permission of IFAC.

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HONG KONG STANDARD ON AUDITING 330


(Effective for audits of financial statements for periods beginning on or after 15 December 2009)

CONTENTS

Paragraph

Introduction

Scope of this HKSA .................................................................................................................. 1

Effective Date ........................................................................................................................... 2

Objective ................................................................................................................................. 3

Definitions ............................................................................................................................... 4

Requirements

Overall Responses ................................................................................................................... 5

Audit Procedures Responsive to the Assessed Risks of Material Misstatement

at the Assertion Level ........................................................................................................ 6-23

Adequacy of Presentation and Disclosure ............................................................................... 24

Evaluating the Sufficiency and Appropriateness of Audit Evidence ........................................ 25-27

Documentation ......................................................................................................................... 28-30

Conformity and Compliance with International Standards on Auditing .......................... 31

Application and Other Explanatory Material

Overall Responses ................................................................................................................... A1-A3

Audit Procedures Responsive to the Assessed Risks of Material Misstatement

at the Assertion Level ........................................................................................................ A4-A58

Adequacy of Presentation and Disclosure ............................................................................... A59

Evaluating the Sufficiency and Appropriateness of Audit Evidence ........................................ A60-A62

Documentation ......................................................................................................................... A63

Hong Kong Standard on Auditing (HKSA) 330, “The Auditor’s Responses to Assessed Risks” should

be read in conjunction with HKSA 200, “Overall Objectives of the Independent Auditor and the

Conduct of an Audit in Accordance with Hong Kong Standards on Auditing.”


© Copyright 4 HKSA 330 (July 2010)

Introduction

Scope of this HKSA

1. This Hong Kong Standard on Auditing (HKSA) deals with the auditor’s responsibility to design

and implement responses to the risks of material misstatement identified and assessed by the

auditor in accordance with HKSA 3151 in an audit of financial statements.

Effective Date

2. This HKSA is effective for audits of financial statements for periods beginning on or after 15

December 2009.

Objective

3. The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the

assessed risks of material misstatement, through designing and implementing appropriate

responses to those risks.

Definitions

4. For purposes of the HKSAs, the following terms have the meanings attributed below:

(a) Substantive procedure – An audit procedure designed to detect material misstatements

at the assertion level. Substantive procedures comprise:

(i) Tests of details (of classes of transactions, account balances, and disclosures); and

(ii) Substantive analytical procedures.

(b) Test of controls – An audit procedure designed to evaluate the operating effectiveness

of controls in preventing, or detecting and correcting, material misstatements at the

assertion level.

Requirements

Overall Responses

5. The auditor shall design and implement overall responses to address the assessed risks of

material misstatement at the financial statement level. (Ref: Para. A1-A3)

Audit Procedures Responsive to the Assessed Risks of Material Misstatement at the Assertion

Level

6. The auditor shall design and perform further audit procedures whose nature, timing and

extent are based on and are responsive to the assessed risks of material misstatement at the

assertion level. (Ref: Para. A4-A8)

1

HKSA 315, “Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its

Environment.”



7. In designing the further audit procedures to be performed, the auditor shall:

(a) Consider the reasons for the assessment given to the risk of material misstatement at

the assertion level for each class of transactions, account balance, and disclosure,

including:

(i) The likelihood of material misstatement due to the particular characteristics of

the relevant class of transactions, account balance, or disclosure (that is, the

inherent risk); and

(ii) Whether the risk assessment takes account of relevant controls (that is, the

control risk), thereby requiring the auditor to obtain audit evidence to determine

whether the controls are operating effectively (that is, the auditor intends to rely

on the operating effectiveness of controls in determining the nature, timing and

extent of substantive procedures); and (Ref: Para. A9-A18)

(b) Obtain more persuasive audit evidence the higher the auditor’s assessment of risk.

(Ref: Para. A19)

Tests of Controls

8. The auditor shall design and perform tests of controls to obtain sufficient appropriate audit

evidence as to the operating effectiveness of relevant controls if:

(a) The auditor’s assessment of risks of material misstatement at the assertion level

includes an expectation that the controls are operating effectively (that is, the auditor

intends to rely on the operating effectiveness of controls in determining the nature,

timing and extent of substantive procedures); or

(b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at

the assertion level. (Ref: Para. A20-A24)

9. In designing and performing tests of controls, the auditor shall obtain more persuasive audit

evidence the greater the reliance the auditor places on the effectiveness of a control. (Ref:

Para. A25)

Nature and Extent of Tests of Controls

10. In designing and performing tests of controls, the auditor shall:

(a) Perform other audit procedures in combination with inquiry to obtain audit evidence

about the operating effectiveness of the controls, including:

(i) How the controls were applied at relevant times during the period under audit;

(ii) The consistency with which they were applied; and

(iii) By whom or by what means they were applied. (Ref: Para. A26-A29)

(b) Determine whether the controls to be tested depend upon other controls (indirect

controls), and, if so, whether it is necessary to obtain audit evidence supporting the

effective operation of those indirect controls. (Ref: Para. A30-A31)



Timing of Tests of Controls

11. The auditor shall test controls for the particular time, or throughout the period, for which the

auditor intends to rely on those controls, subject to paragraphs 12 and 15 below, in order to

provide an appropriate basis for the auditor’s intended reliance. (Ref: Para. A32)

Using audit evidence obtained during an interim period

12. If the auditor obtains audit evidence about the operating effectiveness of controls during an

interim period, the auditor shall:

(a) Obtain audit evidence about significant changes to those controls subsequent to the

interim period; and

(b) Determine the additional audit evidence to be obtained for the remaining period. (Ref:

Para. A33-A34)

Using audit evidence obtained in previous audits

13. In determining whether it is appropriate to use audit evidence about the operating

effectiveness of controls obtained in previous audits, and, if so, the length of the time period

that may elapse before retesting a control, the auditor shall consider the following:

(a) The effectiveness of other elements of internal control, including the control

environment, the entity’s monitoring of controls, and the entity’s risk assessment

process;

(b) The risks arising from the characteristics of the control, including whether it is manual

or automated;

(c) The effectiveness of general IT controls;

(d) The effectiveness of the control and its application by the entity, including the nature

and extent of deviations in the application of the control noted in previous audits, and

whether there have been personnel changes that significantly affect the application of

the control;

(e) Whether the lack of a change in a particular control poses a risk due to changing

circumstances; and

(f) The risks of material misstatement and the extent of reliance on the control. (Ref: Para.

A35)

14. If the auditor plans to use audit evidence from a previous audit about the operating

effectiveness of specific controls, the auditor shall establish the continuing relevance of that

evidence by obtaining audit evidence about whether significant changes in those controls

have occurred subsequent to the previous audit. The auditor shall obtain this evidence by

performing inquiry combined with observation or inspection, to confirm the understanding of

those specific controls, and:

(a) If there have been changes that affect the continuing relevance of the audit evidence

from the previous audit, the auditor shall test the controls in the current audit. (Ref:

Para. A36)



(b) If there have not been such changes, the auditor shall test the controls at least once in

every third audit, and shall test some controls each audit to avoid the possibility of

testing all the controls on which the auditor intends to rely in a single audit period with

no testing of controls in the subsequent two audit periods. (Ref: Para. A37-39)

Controls over significant risks

15. If the auditor plans to rely on controls over a risk the auditor has determined to be a significant

risk, the auditor shall test those controls in the current period.

Evaluating the Operating Effectiveness of Controls

16. When evaluating the operating effectiveness of relevant controls, the auditor shall evaluate

whether misstatements that have been detected by substantive procedures indicate that

controls are not operating effectively. The absence of misstatements detected by substantive

procedures, however, does not provide audit evidence that controls related to the assertion

being tested are effective. (Ref: Para. A40)

17. If deviations from controls upon which the auditor intends to rely are detected, the auditor

shall make specific inquiries to understand these matters and their potential consequences,

and shall determine whether: (Ref: Para. A41)

(a) The tests of controls that have been performed provide an appropriate basis for

reliance on the controls;

(b) Additional tests of controls are necessary; or

(c) The potential risks of misstatement need to be addressed using substantive

procedures.

Substantive Procedures

18. Irrespective of the assessed risks of material misstatement, the auditor shall design and

perform substantive procedures for each material class of transactions, account balance, and

disclosure. (Ref: Para. A42-A47)

19. The auditor shall consider whether external confirmation procedures are to be performed as

substantive audit procedures. (Ref: Para. A48-A51)

Substantive Procedures Related to the Financial Statement Closing Process

20. The auditor’s substantive procedures shall include the following audit procedures related to

the financial statement closing process:

(a) Agreeing or reconciling the financial statements with the underlying accounting records;

and

(b) Examining material journal entries and other adjustments made during the course of

preparing the financial statements. (Ref: Para. A52)

Substantive Procedures Responsive to Significant Risks

21. If the auditor has determined that an assessed risk of material misstatement at the assertion

level is a significant risk, the auditor shall perform substantive procedures that are specifically

responsive to that risk. When the approach to a significant risk consists only of substantive

procedures, those procedures shall include tests of details. (Ref: Para. A53)



Timing of Substantive Procedures

22. If substantive procedures are performed at an interim date, the auditor shall cover the

remaining period by performing:

(a) substantive procedures, combined with tests of controls for the intervening period; or

(b) if the auditor determines that it is sufficient, further substantive procedures only

that provide a reasonable basis for extending the audit conclusions from the interim date to

the period end. (Ref: Para. A54-A57)

23. If misstatements that the auditor did not expect when assessing the risks of material

misstatement are detected at an interim date, the auditor shall evaluate whether the related

assessment of risk and the planned nature, timing or extent of substantive procedures

covering the remaining period need to be modified. (Ref: Para. A58)

Adequacy of Presentation and Disclosure

24. The auditor shall perform audit procedures to evaluate whether the overall presentation of the

financial statements, including the related disclosures, is in accordance with the applicable

financial reporting framework. (Ref: Para. A59)

Evaluating the Sufficiency and Appropriateness of Audit Evidence

25. Based on the audit procedures performed and the audit evidence obtained, the auditor shall

evaluate before the conclusion of the audit whether the assessments of the risks of material

misstatement at the assertion level remain appropriate. (Ref: Para. A60-A61)

26. The auditor shall conclude whether sufficient appropriate audit evidence has been obtained.

In forming an opinion, the auditor shall consider all relevant audit evidence, regardless of

whether it appears to corroborate or to contradict the assertions in the financial statements.

(Ref: Para. A62)

27. If the auditor has not obtained sufficient appropriate audit evidence as to a material financial

statement assertion, the auditor shall attempt to obtain further audit evidence. If the auditor is

unable to obtain sufficient appropriate audit evidence, the auditor shall express a qualified

opinion or disclaim an opinion on the financial statements.

Documentation

28. The auditor shall include in the audit documentation: 2

(a) The overall responses to address the assessed risks of material misstatement at the

financial statement level, and the nature, timing and extent of the further audit

procedures performed;

(b) The linkage of those procedures with the assessed risks at the assertion level; and

(c) The results of the audit procedures, including the conclusions where these are not

otherwise clear. (Ref: Para. A63)

2 HKSA 230, “Audit Documentation,” paragraphs 8-11, and A6.


© Copyright 9 HKSA 330 (December 2012)

29. If the auditor plans to use audit evidence about the operating effectiveness of controls

obtained in previous audits, the auditor shall include in the audit documentation the

conclusions reached about relying on such controls that were tested in a previous audit.

30. The auditor’s documentation shall demonstrate that the financial statements agree or

reconcile with the underlying accounting records.

Conformity and Compliance with International Standards on Auditing

31. As of June 2009 (date of issue), this HKSA conforms with International Standard on Auditing

(ISA) 330, “The Auditor’s Responses To Assessed Risks”. Compliance with the requirements

of this HKSA ensures compliance with ISA 330.

* * *

Application and Other Explanatory Material

Overall Responses (Ref: Para. 5)

A1. Overall responses to address the assessed risks of material misstatement at the financial

statement level may include:

Emphasizing to the engagement team the need to maintain professional skepticism.

Assigning more experienced staff or those with special skills or using experts.

Providing more supervision.

Incorporating additional elements of unpredictability in the selection of further audit

procedures to be performed.

Making general changes to the nature, timing or extent of audit procedures, for

example: performing substantive procedures at the period end instead of at an interim

date; or modifying the nature of audit procedures to obtain more persuasive audit

evidence.

A2. The assessment of the risks of material misstatement at the financial statement level, and

thereby the auditor’s overall responses, is affected by the auditor’s understanding of the

control environment. An effective control environment may allow the auditor to have more

confidence in internal control and the reliability of audit evidence generated internally within

the entity and thus, for example, allow the auditor to conduct some audit procedures at an

interim date rather than at the period end. Deficiencies in the control environment, however,

have the opposite effect; for example, the auditor may respond to an ineffective control

environment by:

Conducting more audit procedures as of the period end rather than at an interim date.

Obtaining more extensive audit evidence from substantive procedures.

Increasing the number of locations to be included in the audit scope.

A3. Such considerations, therefore, have a significant bearing on the auditor’s general approach,

for example, an emphasis on substantive procedures (substantive approach), or an approach

that uses tests of controls as well as substantive procedures (combined approach).



Audit Procedures Responsive to the Assessed Risks of Material Misstatement at the Assertion

Level

The Nature, Timing and Extent of Further Audit Procedures (Ref: Para. 6)

A4. The auditor’s assessment of the identified risks at the assertion level provides a basis for

considering the appropriate audit approach for designing and performing further audit

procedures. For example, the auditor may determine that:

(a) Only by performing tests of controls may the auditor achieve an effective response to

the assessed risk of material misstatement for a particular assertion;

(b) Performing only substantive procedures is appropriate for particular assertions and,

therefore, the auditor excludes the effect of controls from the relevant risk assessment.

This may be because the auditor’s risk assessment procedures have not identified any

effective controls relevant to the assertion, or because testing controls would be

inefficient and therefore the auditor does not intend to rely on the operating

effectiveness of controls in determining the nature, timing and extent of substantive

procedures; or

(c) A combined approach using both tests of controls and substantive procedures is an

effective approach.

However, as required by paragraph 18, irrespective of the approach selected, the auditor

designs and performs substantive procedures for each material class of transactions, account

balance, and disclosure.

A5. The nature of an audit procedure refers to its purpose (that is, test of controls or substantive

procedure) and its type (that is, inspection, observation, inquiry, confirmation, recalculation,

reperformance, or analytical procedure). The nature of the audit procedures is of most

importance in responding to the assessed risks.

A6. Timing of an audit procedure refers to when it is performed, or the period or date to which the

audit evidence applies.

A7. Extent of an audit procedure refers to the quantity to be performed, for example, a sample

size or the number of observations of a control activity.

A8. Designing and performing further audit procedures whose nature, timing and extent are based

on and are responsive to the assessed risks of material misstatement at the assertion level

provides a clear linkage between the auditor’s further audit procedures and the risk

assessment.

Responding to the Assessed Risks at the Assertion Level (Ref: Para. 7(a))

Nature

A9. The auditor’s assessed risks may affect both the types of audit procedures to be performed

and their combination. For example, when an assessed risk is high, the auditor may confirm

the completeness of the terms of a contract with the counterparty, in addition to inspecting the

document. Further, certain audit procedures may be more appropriate for some assertions

than others. For example, in relation to revenue, tests of controls may be most responsive to

the assessed risk of misstatement of the completeness assertion, whereas substantive

procedures may be most responsive to the assessed risk of misstatement of the occurrence

assertion.



A10. The reasons for the assessment given to a risk are relevant in determining the nature of audit

procedures. For example, if an assessed risk is lower because of the particular characteristics

of a class of transactions without consideration of the related controls, then the auditor may

determine that substantive analytical procedures alone provide sufficient appropriate audit

evidence. On the other hand, if the assessed risk is lower because of internal controls, and

the auditor intends to base the substantive procedures on that low assessment, then the

auditor performs tests of those controls, as required by paragraph 8(a). This may be the case,

for example, for a class of transactions of reasonably uniform, non-complex characteristics

that are routinely processed and controlled by the entity’s information system.

Timing

A11. The auditor may perform tests of controls or substantive procedures at an interim date or at

the period end. The higher the risk of material misstatement, the more likely it is that the

auditor may decide it is more effective to perform substantive procedures nearer to, or at, the

period end rather than at an earlier date, or to perform audit procedures unannounced or at

unpredictable times (for example, performing audit procedures at selected locations on an

unannounced basis). This is particularly relevant when considering the response to the risks

of fraud. For example, the auditor may conclude that, when the risks of intentional

misstatement or manipulation have been identified, audit procedures to extend audit

conclusions from interim date to the period end would not be effective.

A12. On the other hand, performing audit procedures before the period end may assist the auditor

in identifying significant matters at an early stage of the audit, and consequently resolving

them with the assistance of management or developing an effective audit approach to

address such matters.

A13. In addition, certain audit procedures can be performed only at or after the period end, for

example:

Agreeing the financial statements to the accounting records;

Examining adjustments made during the course of preparing the financial statements;

and

Procedures to respond to a risk that, at the period end, the entity may have entered

into improper sales contracts, or transactions may not have been finalized.

A14. Further relevant factors that influence the auditor’s consideration of when to perform audit

procedures include the following:

The control environment.

When relevant information is available (for example, electronic files may subsequently

be overwritten, or procedures to be observed may occur only at certain times).

The nature of the risk (for example, if there is a risk of inflated revenues to meet

earnings expectations by subsequent creation of false sales agreements, the auditor

may wish to examine contracts available on the date of the period end).

The period or date to which the audit evidence relates.



Extent

A15. The extent of an audit procedure judged necessary is determined after considering the

materiality, the assessed risk, and the degree of assurance the auditor plans to obtain. When

a single purpose is met by a combination of procedures, the extent of each procedure is

considered separately. In general, the extent of audit procedures increases as the risk of

material misstatement increases. For example, in response to the assessed risk of material

misstatement due to fraud, increasing sample sizes or performing substantive analytical

procedures at a more detailed level may be appropriate. However, increasing the extent of an

audit procedure is effective only if the audit procedure itself is relevant to the specific risk.

A16. The use of computer-assisted audit techniques (CAATs) may enable more extensive testing

of electronic transactions and account files, which may be useful when the auditor decides to

modify the extent of testing, for example, in responding to the risks of material misstatement

due to fraud. Such techniques can be used to select sample transactions from key electronic

files, to sort transactions with specific characteristics, or to test an entire population instead of

a sample.

Considerations specific to public sector entities

A17. For the audits of public sector entities, the audit mandate and any other special auditing

requirements may affect the auditor’s consideration of the nature, timing and extent of further

audit procedures.

Considerations specific to smaller entities

A18. In the case of very small entities, there may not be many control activities that could be

identified by the auditor, or the extent to which their existence or operation have been

documented by the entity may be limited. In such cases, it may be more efficient for the

auditor to perform further audit procedures that are primarily substantive procedures. In some

rare cases, however, the absence of control activities or of other components of control may

make it impossible to obtain sufficient appropriate audit evidence.

Higher Assessments of Risk (Ref: Para. 7(b))

A19. When obtaining more persuasive audit evidence because of a higher assessment of risk, the

auditor may increase the quantity of the evidence, or obtain evidence that is more relevant or

reliable, for example, by placing more emphasis on obtaining third party evidence or by

obtaining corroborating evidence from a number of independent sources.

Tests of Controls

Designing and Performing Tests of Controls (Ref: Para. 8)

A20. Tests of controls are performed only on those controls that the auditor has determined are

suitably designed to prevent, or detect and correct, a material misstatement in an assertion. If

substantially different controls were used at different times during the period under audit, each

is considered separately.

A21. Testing the operating effectiveness of controls is different from obtaining an understanding of

and evaluating the design and implementation of controls. However, the same types of audit

procedures are used. The auditor may, therefore, decide it is efficient to test the operating

effectiveness of controls at the same time as evaluating their design and determining that

they have been implemented.



A22. Further, although some risk assessment procedures may not have been specifically designed

as tests of controls, they may nevertheless provide audit evidence about the operating

effectiveness of the controls and, consequently, serve as tests of controls. For example, the

auditor’s risk assessment procedures may have included:

Inquiring about management’s use of budgets.

Observing management’s comparison of monthly budgeted and actual expenses.

Inspecting reports pertaining to the investigation of variances between budgeted and

actual amounts.

These audit procedures provide knowledge about the design of the entity’s budgeting policies

and whether they have been implemented, but may also provide audit evidence about the

effectiveness of the operation of budgeting policies in preventing or detecting material

misstatements in the classification of expenses.

A23. In addition, the auditor may design a test of controls to be performed concurrently with a test

of details on the same transaction. Although the purpose of a test of controls is different from

the purpose of a test of details, both may be accomplished concurrently by performing a test

of controls and a test of details on the same transaction, also known as a dual-purpose test.

For example, the auditor may design, and evaluate the results of, a test to examine an invoice

to determine whether it has been approved and to provide substantive audit evidence of a

transaction. A dual-purpose test is designed and evaluated by considering each purpose of

the test separately.

A24. In some cases, the auditor may find it impossible to design effective substantive procedures

that by themselves provide sufficient appropriate audit evidence at the assertion level. 3 This

may occur when an entity conducts its business using IT and no documentation of

transactions is produced or maintained, other than through the IT system. In such cases,

paragraph 8(b) requires the auditor to perform tests of relevant controls.

Audit Evidence and Intended Reliance (Ref: Para. 9)

A25. A higher level of assurance may be sought about the operating effectiveness of controls when

the approach adopted consists primarily of tests of controls, in particular where it is not

possible or practicable to obtain sufficient appropriate audit evidence only from substantive

procedures.

Nature and Extent of Tests of Controls

Other audit procedures in combination with inquiry (Ref: Para. 10(a))

A26. Inquiry alone is not sufficient to test the operating effectiveness of controls. Accordingly, other

audit procedures are performed in combination with inquiry. In this regard, inquiry combined

with inspection or reperformance may provide more assurance than inquiry and observation,

since an observation is pertinent only at the point in time at which it is made.

A27. The nature of the particular control influences the type of procedure required to obtain audit

evidence about whether the control was operating effectively. For example, if operating

effectiveness is evidenced by documentation, the auditor may decide to inspect it to obtain

audit evidence about operating effectiveness. For other controls, however, documentation

may not be available or relevant. For example, documentation of operation may not exist for

some factors in the control environment, such as assignment of authority and responsibility,

3

HKSA 315, paragraph 30.



or for some types of control activities, such as control activities performed by a computer. In

such circumstances, audit evidence about operating effectiveness may be obtained through

inquiry in combination with other audit procedures such as observation or the use of CAATs.

Extent of tests of controls

A28. When more persuasive audit evidence is needed regarding the effectiveness of a control, it

may be appropriate to increase the extent of testing of the control. As well as the degree of

reliance on controls, matters the auditor may consider in determining the extent of tests of

controls include the following:

The frequency of the performance of the control by the entity during the period.

The length of time during the audit period that the auditor is relying on the operating

effectiveness of the control.

The expected rate of deviation from a control.

The relevance and reliability of the audit evidence to be obtained regarding the

operating effectiveness of the control at the assertion level.

The extent to which audit evidence is obtained from tests of other controls related to

the assertion.

HKSA 5304 contains further guidance on the extent of testing.

A29. Because of the inherent consistency of IT processing, it may not be necessary to increase the

extent of testing of an automated control. An automated control can be expected to function

consistently unless the program (including the tables, files, or other permanent data used by

the program) is changed. Once the auditor determines that an automated control is

functioning as intended (which could be done at the time the control is initially implemented or

at some other date), the auditor may consider performing tests to determine that the control

continues to function effectively. Such tests might include determining that:

Changes to the program are not made without being subject to the appropriate

program change controls;

The authorized version of the program is used for processing transactions; and

Other relevant general controls are effective.

Such tests also might include determining that changes to the programs have not been made, as

may be the case when the entity uses packaged software applications without modifying or

maintaining them. For example, the auditor may inspect the record of the administration of IT

security to obtain audit evidence that unauthorized access has not occurred during the period.

Testing of indirect controls (Ref: Para. 10(b))

A30. In some circumstances, it may be necessary to obtain audit evidence supporting the effective

operation of indirect controls. For example, when the auditor decides to test the effectiveness

of a user review of exception reports detailing sales in excess of authorized credit limits, the

user review and related follow up is the control that is directly of relevance to the auditor.

Controls over the accuracy of the information in the reports (for example, the general IT

controls) are described as “indirect” controls.

4

HKSA 530, “Audit Sampling.”



A31. Because of the inherent consistency of IT processing, audit evidence about the

implementation of an automated application control, when considered in combination with

audit evidence about the operating effectiveness of the entity’s general controls (in particular,

change controls), may also provide substantial audit evidence about its operating

effectiveness.

Timing of Tests of Controls

Intended period of reliance (Ref: Para. 11)

A32. Audit evidence pertaining only to a point in time may be sufficient for the auditor’s purpose, for

example, when testing controls over the entity’s physical inventory counting at the period end.

If, on the other hand, the auditor intends to rely on a control over a period, tests that are

capable of providing audit evidence that the control operated effectively at relevant times

during that period are appropriate. Such tests may include tests of the entity’s monitoring of

controls.

Using audit evidence obtained during an interim period (Ref: Para. 12(b))

A33. Relevant factors in determining what additional audit evidence to obtain about controls that

were operating during the period remaining after an interim period, include:

The significance of the assessed risks of material misstatement at the assertion level.

The specific controls that were tested during the interim period, and significant changes

to them since they were tested, including changes in the information system,

processes, and personnel.

The degree to which audit evidence about the operating effectiveness of those controls

was obtained.

The length of the remaining period.

The extent to which the auditor intends to reduce further substantive procedures based

on the reliance of controls.

The control environment.

A34. Additional audit evidence may be obtained, for example, by extending tests of controls over

the remaining period or testing the entity’s monitoring of controls.

Using audit evidence obtained in previous audits (Ref: Para. 13)

A35. In certain circumstances, audit evidence obtained from previous audits may provide audit

evidence where the auditor performs audit procedures to establish its continuing relevance.

For example, in performing a previous audit, the auditor may have determined that an

automated control was functioning as intended. The auditor may obtain audit evidence to

determine whether changes to the automated control have been made that affect its

continued effective functioning through, for example, inquiries of management and the

inspection of logs to indicate what controls have been changed. Consideration of audit

evidence about these changes may support either increasing or decreasing the expected

audit evidence to be obtained in the current period about the operating effectiveness of the

controls.



Controls that have changed from previous audits (Ref: Para. 14(a))

A36. Changes may affect the relevance of the audit evidence obtained in previous audits such that

there may no longer be a basis for continued reliance. For example, changes in a system that

enable an entity to receive a new report from the system probably do not affect the relevance

of audit evidence from a previous audit; however, a change that causes data to be

accumulated or calculated differently does affect it.

Controls that have not changed from previous audits (Ref: Para. 14(b))

A37. The auditor’s decision on whether to rely on audit evidence obtained in previous audits for

controls that:

(a) have not changed since they were last tested; and

(b) are not controls that mitigate a significant risk,

is a matter of professional judgment. In addition, the length of time between retesting such

controls is also a matter of professional judgment, but is required by paragraph 14 (b) to be at

least once in every third year.

A38. In general, the higher the risk of material misstatement, or the greater the reliance on controls,

the shorter the time period elapsed, if any, is likely to be. Factors that may decrease the

period for retesting a control, or result in not relying on audit evidence obtained in previous

audits at all, include the following:

A deficient control environment.

Deficient monitoring of controls.

A significant manual element to the relevant controls.

Personnel changes that significantly affect the application of the control.

Changing circumstances that indicate the need for changes in the control.

Deficient general IT controls.

A39. When there are a number of controls for which the auditor intends to rely on audit evidence

obtained in previous audits, testing some of those controls in each audit provides

corroborating information about the continuing effectiveness of the control environment. This

contributes to the auditor’s decision about whether it is appropriate to rely on audit evidence

obtained in previous audits.

Evaluating the Operating Effectiveness of Controls (Ref: Para. 16-17)

A40. A material misstatement detected by the auditor’s procedures is a strong indicator of the

existence of a significant deficiency in internal control.

A41. The concept of effectiveness of the operation of controls recognizes that some deviations in

the way controls are applied by the entity may occur. Deviations from prescribed controls may

be caused by such factors as changes in key personnel, significant seasonal fluctuations in

volume of transactions and human error. The detected rate of deviation, in particular in

comparison with the expected rate, may indicate that the control cannot be relied on to reduce

risk at the assertion level to that assessed by the auditor.



Substantive Procedures (Ref: Para. 18)

A42. Paragraph 18 requires the auditor to design and perform substantive procedures for each

material class of transactions, account balance, and disclosure, irrespective of the assessed

risks of material misstatement. This requirement reflects the facts that: (a) the auditor’s

assessment of risk is judgmental and so may not identify all risks of material misstatement;

and (b) there are inherent limitations to internal control, including management override.

Nature and Extent of Substantive Procedures

A43. Depending on the circumstances, the auditor may determine that:

Performing only substantive analytical procedures will be sufficient to reduce audit risk

to an acceptably low level. For example, where the auditor’s assessment of risk is

supported by audit evidence from tests of controls.

Only tests of details are appropriate.

A combination of substantive analytical procedures and tests of details are most

responsive to the assessed risks.

A44. Substantive analytical procedures are generally more applicable to large volumes of

transactions that tend to be predictable over time. HKSA 520 5 establishes requirements and

provides guidance on the application of analytical procedures during an audit.

A45. The nature of the risk and assertion is relevant to the design of tests of details. For example,

tests of details related to the existence or occurrence assertion may involve selecting from

items contained in a financial statement amount and obtaining the relevant audit evidence. On

the other hand, tests of details related to the completeness assertion may involve selecting

from items that are expected to be included in the relevant financial statement amount and

investigating whether they are included.

A46. Because the assessment of the risk of material misstatement takes account of internal control,

the extent of substantive procedures may need to be increased when the results from tests of

controls are unsatisfactory. However, increasing the extent of an audit procedure is

appropriate only if the audit procedure itself is relevant to the specific risk.

A47. In designing tests of details, the extent of testing is ordinarily thought of in terms of the sample

size. However, other matters are also relevant, including whether it is more effective to use

other selective means of testing. See HKSA 500. 6

Considering Whether External Confirmation Procedures Are to Be Performed (Ref: Para. 19)

A48. External confirmation procedures frequently are relevant when addressing assertions

associated with account balances and their elements, but need not be restricted to these

items. For example, the auditor may request external confirmation of the terms of

agreements, contracts, or transactions between an entity and other parties. External

confirmation procedures also may be performed to obtain audit evidence about the absence

of certain conditions. For example, a request may specifically seek confirmation that no “side

agreement” exists that may be relevant to an entity’s revenue cutoff assertion. Other

situations where external confirmation procedures may provide relevant audit evidence in

responding to assessed risks of material misstatement include:

5 HKSA 520, “Analytical Procedures.”

6 HKSA 500, “Audit Evidence,” paragraph 10.



Bank balances and other information relevant to banking relationships.

Accounts receivable balances and terms.

Inventories held by third parties at bonded warehouses for processing or on

consignment.

Property title deeds held by lawyers or financiers for safe custody or as security.

Investments held for safekeeping by third parties, or purchased from stockbrokers but

not delivered at the balance sheet date.

Amounts due to lenders, including relevant terms of repayment and restrictive

covenants.

Accounts payable balances and terms.

A49. Although external confirmations may provide relevant audit evidence relating to certain

assertions, there are some assertions for which external confirmations provide less relevant

audit evidence. For example, external confirmations provide less relevant audit evidence

relating to the recoverability of accounts receivable balances, than they do of their existence.

A50. The auditor may determine that external confirmation procedures performed for one purpose

provide an opportunity to obtain audit evidence about other matters. For example,

confirmation requests for bank balances often include requests for information relevant to

other financial statement assertions. Such considerations may influence the auditor’s decision

about whether to perform external confirmation procedures.

A51. Factors that may assist the auditor in determining whether external confirmation procedures

are to be performed as substantive audit procedures include:

The confirming party’s knowledge of the subject matter – responses may be more

reliable if provided by a person at the confirming party who has the requisite knowledge

about the information being confirmed.

The ability or willingness of the intended confirming party to respond – for example, the

confirming party:

o May not accept responsibility for responding to a confirmation request;

o May consider responding too costly or time consuming;

o May have concerns about the potential legal liability resulting from responding;

o May account for transactions in different currencies; or

o May operate in an environment where responding to confirmation requests is not

a significant aspect of day-to-day operations.

In such situations, confirming parties may not respond, may respond in a casual

manner or may attempt to restrict the reliance placed on the response.

The objectivity of the intended confirming party – if the confirming party is a related

party of the entity, responses to confirmation requests may be less reliable.



Substantive Procedures Related to the Financial Statement Closing Process (Ref: Para. 20(b))

A52. The nature, and also the extent, of the auditor’s examination of journal entries and other

adjustments depends on the nature and complexity of the entity’s financial reporting process

and the related risks of material misstatement.

Substantive Procedures Responsive to Significant Risks (Ref: Para. 21)

A53. Paragraph 21 of this HKSA requires the auditor to perform substantive procedures that are

specifically responsive to risks the auditor has determined to be significant risks. Audit

evidence in the form of external confirmations received directly by the auditor from

appropriate confirming parties may assist the auditor in obtaining audit evidence with the high

level of reliability that the auditor requires to respond to significant risks of material

misstatement, whether due to fraud or error. For example, if the auditor identifies that

management is under pressure to meet earnings expectations, there may be a risk that

management is inflating sales by improperly recognizing revenue related to sales agreements

with terms that preclude revenue recognition or by invoicing sales before shipment. In these

circumstances, the auditor may, for example, design external confirmation procedures not

only to confirm outstanding amounts, but also to confirm the details of the sales agreements,

including date, any rights of return and delivery terms. In addition, the auditor may find it

effective to supplement such external confirmation procedures with inquiries of non-financial

personnel in the entity regarding any changes in sales agreements and delivery terms.

Timing of Substantive Procedures (Ref: Para. 22-23)

A54. In most cases, audit evidence from a previous audit’s substantive procedures provides little or

no audit evidence for the current period. There are, however, exceptions, for example, a legal

opinion obtained in a previous audit related to the structure of a securitization to which no

changes have occurred, may be relevant in the current period. In such cases, it may be

appropriate to use audit evidence from a previous audit’s substantive procedures if that

evidence and the related subject matter have not fundamentally changed, and audit

procedures have been performed during the current period to establish its continuing

relevance.

Using audit evidence obtained during an interim period (Ref: Para. 22)

A55. In some circumstances, the auditor may determine that it is effective to perform substantive

procedures at an interim date, and to compare and reconcile information concerning the

balance at the period end with the comparable information at the interim date to:

(a) Identify amounts that appear unusual;

(b) Investigate any such amounts; and

(c) Perform substantive analytical procedures or tests of details to test the intervening

period.

A56. Performing substantive procedures at an interim date without undertaking additional

procedures at a later date increases the risk that the auditor will not detect misstatements that

may exist at the period end. This risk increases as the remaining period is lengthened.

Factors such as the following may influence whether to perform substantive procedures at an

interim date:

The control environment and other relevant controls.

The availability at a later date of information necessary for the auditor’s procedures.



The purpose of the substantive procedure.

The assessed risk of material misstatement.

The nature of the class of transactions or account balance and related assertions.

The ability of the auditor to perform appropriate substantive procedures or substantive

procedures combined with tests of controls to cover the remaining period in order to

reduce the risk that misstatements that may exist at the period end will not be detected.

A57. Factors such as the following may influence whether to perform substantive analytical

procedures with respect to the period between the interim date and the period end:

Whether the period end balances of the particular classes of transactions or account

balances are reasonably predictable with respect to amount, relative significance, and

composition.

Whether the entity’s procedures for analyzing and adjusting such classes of

transactions or account balances at interim dates and for establishing proper

accounting cutoffs are appropriate.

Whether the information system relevant to financial reporting will provide information

concerning the balances at the period end and the transactions in the remaining period

that is sufficient to permit investigation of:

(a) Significant unusual transactions or entries (including those at or near the period

end);

(b) Other causes of significant fluctuations, or expected fluctuations that did not occur;

and

(c) Changes in the composition of the classes of transactions or account balances.

Misstatements detected at an interim date (Ref: Para. 23)

A58. When the auditor concludes that the planned nature, timing or extent of substantive

procedures covering the remaining period need to be modified as a result of unexpected

misstatements detected at an interim date, such modification may include extending or

repeating the procedures performed at the interim date at the period end.

Adequacy of Presentation and Disclosure (Ref: Para. 24)

A59. Evaluating the overall presentation of the financial statements, including the related disclosures,

relates to whether the individual financial statements are presented in a manner that reflects the

appropriate classification and description of financial information, and the form, arrangement, and

content of the financial statements and their appended notes. This includes, for example, the

terminology used, the amount of detail given, the classification of items in the statements, and the

bases of amounts set forth.

Evaluating the Sufficiency and Appropriateness of Audit Evidence (Ref: Para. 25-27)

A60. An audit of financial statements is a cumulative and iterative process. As the auditor performs

planned audit procedures, the audit evidence obtained may cause the auditor to modify the

nature, timing or extent of other planned audit procedures. Information may come to the

auditor’s attention that differs significantly from the information on which the risk assessment

was based. For example:



The extent of misstatements that the auditor detects by performing substantive

procedures may alter the auditor’s judgment about the risk assessments and may

indicate a significant deficiency in internal control.

The auditor may become aware of discrepancies in accounting records, or conflicting

or missing evidence.

Analytical procedures performed at the overall review stage of the audit may indicate a

previously unrecognized risk of material misstatement.

In such circumstances, the auditor may need to reevaluate the planned audit procedures,

based on the revised consideration of assessed risks for all or some of the classes of

transactions, account balances, or disclosures and related assertions. HKSA 315 contains

further guidance on revising the auditor’s risk assessment. 7

A61. The auditor cannot assume that an instance of fraud or error is an isolated occurrence.

Therefore, the consideration of how the detection of a misstatement affects the assessed

risks of material misstatement is important in determining whether the assessment remains

appropriate.

A62. The auditor’s judgment as to what constitutes sufficient appropriate audit evidence is

influenced by such factors as the following:

Significance of the potential misstatement in the assertion and the likelihood of its

having a material effect, individually or aggregated with other potential misstatements,

on the financial statements.

Effectiveness of management’s responses and controls to address the risks.

Experience gained during previous audits with respect to similar potential

misstatements.

Results of audit procedures performed, including whether such audit procedures

identified specific instances of fraud or error.

Source and reliability of the available information.

Persuasiveness of the audit evidence.

Understanding of the entity and its environment, including the entity’s internal control.

Documentation (Ref: Para. 28)

A63. The form and extent of audit documentation is a matter of professional judgment, and is

influenced by the nature, size and complexity of the entity and its internal control, availability

of information from the entity and the audit methodology and technology used in the audit.

7 HKSA 315, paragraph 31.

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